Chancellor Rachel Reeves faces increasing pressure from devolved governments due to accusations of underfunding Scotland, Wales, and Northern Ireland following her decision to raise employer national insurance contributions (NICs).
The NICs increase by 1.2% for employers on salaries above £5,000, effective 6 April, is directly funded by the Treasury in England. However, Reeves has opted to apply the Barnett formula for the devolved administrations’ allocations, leading to widespread criticism. While the formula adjusts funding based on population, it fails to consider the significantly larger public sectors in Cardiff, Edinburgh, and Belfast. Finance ministers in these regions claim they are left with major shortfalls and accuse the UK government of violating the UK’s Statement of Funding Policy, which prohibits any administration from financially disadvantaging others.
In Wales, the funding gap is approximately £72 million annually. Welsh Finance Secretary Mark Drakeford confirmed that the government will draw £36 million from reserves to cover half the cost but warned that the remaining burden on local authorities and public bodies would result in 14% cuts. “We have made our position very clear with the Treasury that the use of the Barnett formula in this instance is a breach of the rules,” Drakeford stated. “If this was a one-off, we could have utilised more reserves, but as it stands, this will unfairly impact Wales for years.”
Scotland faces a larger shortfall, estimated at £700 million, with only £339 million in additional funding promised by the Treasury. Northern Ireland is short by around £200 million, with £146 million allocated, still insufficient to meet public sector obligations.
Scottish Finance Secretary Shona Robison has called for the tax rise to be reversed or fully funded. “Failing that,” she remarked, “we request full funding of this tax increase to prevent Scotland’s NHS, councils, and public services from losing vital revenue. It appears Scotland is being penalised for investing in public sector employment.”
Northern Ireland’s civil service, under long-term financial strain, is also concerned that the Treasury’s allocation does not meet the true costs for a devolved government with a high proportion of public sector workers.
A Treasury spokesperson defended the approach, stating it aligns with “agreed funding arrangements and longstanding precedent.” However, the decision revives the debate over the Barnett formula’s relevance, given its temporary implementation in 1978. Critics argue it fails to address real needs, particularly in nations like Wales and Scotland that heavily depend on public sector employment.
The controversy could exacerbate divisions within the Labour Party. With Labour governing at Westminster and in Wales, tensions with Welsh Labour and the UK government have grown. Recent polls indicate Welsh Labour is trailing behind Plaid Cymru and Reform UK before next year’s Senedd elections, with only 18% support. This puts pressure on First Minister Eluned Morgan to show independence from the party’s national leadership.
Amidst the cost of living crisis and increasing issues in public services, the national insurance funding dispute could become a focal point in intergovernmental relations and Labour’s internal stability.
Read more: [Rachel Reeves accused of leaving devolved nations in the red after NICs rise](https://bmmagazine.co.uk/news/rachel-reeves-accused-of-leaving-devolved-nations-in-the-red-after-nics-rise/)
